Steve Keen and Rory Robertson: one of them is on the way to Kosciusko

From Rory’s newsletter

I was in Canberra yesterday, presenting at the Federal Treasury and the Parliamentary Library. Over the past year, I’ve often been the most pessimistic person in the room. My second presentation yesterday, however, followed one by Dr Steve Keen (google, if you are keen), whose high-profile forecast of a 40% drop in Australian home prices has put the wind up many homebuyers and potential home-buyers, not to mention some offshore investors.

Never say never, but a 40% drop in Australian home prices is a highly unlikely event, effectively requiring a meltdown of our financial system despite the combined efforts of the RBA and Canberra. Happily, Australia is not the United States. US home prices are down by about 20% from their mid-2006 peak, while our home prices fell by 2% in Q3, driven by the 150bp increase in mortgage rates overseen by the RBA between July 2007 and July 2008 (now more than fully reversed).

To make it interesting, I offered Dr Keen a challenge. On the maybe 1% chance that he is right, and capital-city home prices do indeed fall by 40% within the next five years – starting from Q2 2008, and as measured by the ABS – I will walk from Canberra to the top of Mt Kosciusko (that’s maybe 200km followed by a 2228-metre incline). If Dr Keen turns out to be less than half right, as I expect, and home prices drop by (much) less than 20%, he will take that long walk. Moreover, the loser must wear a tee-shirt saying: “I was hopelessly wrong on home prices! Ask me how.”

We now have a bet, and I expect to record an easy win within two years. That’s because falls in Australia-wide home prices will be limited by our lack of overbuilding, our much more disciplined mortgage market, and – especially – by the RBA’s ability to drive mortgage rates lower (something the Fed until this week had been unable to do; see latter part of chartset, attached).

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15 years ago

Keen is a bit of a fringe-dweller, but you have to admit that he is willing to stand up boldly for an unpopular belief. To be honest, I do agree with Keen that Economics gets far too much respect for a science that is wrong so often. Physics and chemistry had to incinerate millions of people to earn respect.

I bought a home recently and I expect to have made a profit on it within 10 years (not that I necessarily intend to sell in 10 years, but I don’t want to sell any sooner). My calculation includes the likelihood that the current Labor government will run up a deficit, inflate the currency and inflation will help eat out my loan, while the real asset will keep it’s value. As with everything, it’s a calculated risk.

I do think that home prices will fall a little in the short term, and I wanted to wait before buying but circumstance made that difficult to achieve. A 40% drop in home prices in the middle of Sydney? No way. Not in my lifetime. Interest rates will simply be dropped to ensure that it does not happen. That’s only because home prices are a political fulcrum, regardless of which party holds power on the day, and because Australia is in a much better international position than the USA.

The real issue with this bet is whether you are measuring home prices in AUD or (for argument sake) kilos of potatoes. IMHO, only bets on relative prices are really meaningful (in terms of predicting the actual future, as opposed to predicting government fiscal behaviour). If we want to use potatoes as our measure of value, Keen is in with a chance.

For what it’s worth, (talking long term here) the age of big cities must be coming to an end. I can explain this by the following:
[1] Terrorism — someone always has a grudge, advancing technology implies that the maximum damage a small team of people bent on suicidal revenge is going to get more serious over time, and easier to achieve. The worst place to be is anywhere crowded. Cities were originally designed for mutual defense, technology has resulted in the opposite being true.
[2] Communication — telecommuting has to happen sooner or later, the logic of moving thousands of tonnes of fragile meat long distances at great expense every day gets more questionable all the time we do it.
[3] Fuel crisis — see [2]
[4] Energy crisis — see [2]
[5] Being connected with the happening crowd, see Facebook, then see [2]
[6] Marketplace, no one haggles face to face, it all happens online — see [2]

Private transportation is extremely inefficient, the more people do it, the less efficient it gets. Government just doesn’t have the guts to take on the car lobby, so we all come out losers — see [2].

None of those big changes are going to happen in the next five years.

15 years ago

Tel, I’d argue that the fuel/energy crisis is one reason that big cities are likely to stay popular – it’s quite possible to live in a big city with relatively minimal private transportation needs, whereas it’s virtually impossible if you live in a rural area. The alternative is highly compact medium size towns, but very few of Australia’s medium-sized towns are a) highly compact or b) particularly interesting places to live in, and I don’t see that changing any time soon.

I also suspect the whole government vs car/road lobby thing is a bit overdone – ultimately governments pour far more resources into supporting private transportation because it’s easier to keep marginal voters dependent on it. Eventually that will change, and once marginal voters genuinely care about better mass transit options, governments will have to change tack.

15 years ago

Without communication, each family on the long country street drives a 4×4 in to the market to buy their week worth of food, then drives home again. With communication, one delivery truck visits each house on the street in turn (and probably delivers twice per week). Even though the delivery truck uses more fuel per kilometer, it saves the redundant trips of many small vehicles (and the people get more time to do whatever else they want to do, and the delivery man gets a job). Tis true that comms won’t completely remove the need for transport, but for cases where you really have to be at that wedding in person on the day, well the wedding might be interstate or overseas. Living in a city makes it a shorter trip to the airport but that’s about all it does.

very few of Australias medium-sized towns are a) highly compact or b) particularly interesting places to live in,

I’ve lived in a lot of places around Sydney, including hard-core working class areas like Liverpool and also action-packed right in the middle of the city high density areas. I’ve done my time going out to all the exciting places and seen interesting things… all I can say in summary, it’s expensive, it’s not what it’s cracked up to be, don’t feel bothered in the least if you miss out. The perspective that I’ve come to is that boring neighbours are good neighbours, and distant neighbours are even better neighbours. I’ve discovered something that is universally appreciated when you move to a new area, is to explain to the locals that I’m a really boring guy, who has absolutely no interest in anything they are doing, and I buy from the local shops where I can. With that formula you can fit in anywhere.

Living in a small city terrace you always have access to open shops within a short walk so there’s no incentive for local storage. But then, you are living in a shoebox with no possibility of storage, and the city shops consistently offer goods at “sell a kidney” pricing (they have to pay their rent, so you have to pay their rent). First thing I bought when I moved away from town was a chest freezer because I actually had a few square meters of floorspace to put it on, next thing was finding the local bulk-meat stores. My only remaining tie to the city at all is work opportunities.

15 years ago

Well I suspect we’re both guilty of extrapolating our personal preferences on to the general population!

However your idea that communications can significantly reduce the personal transport requirements of those living in rural and semi-rural areas doesn’t ring true to me – outside of food shopping, almost every common activity necessitates use of a car: visiting friends, eating out, non-food shopping (a large garden almost necessitates weekly trips to the hardware/garden store), etc. etc.
Indeed I’m not sure food shopping makes up a significant percentage of total km driven each year, but that total is surely far higher than for almost anyone living within, say, 10km of a major city centre (unless they happen to work in the outer suburbs – more common than you’d think).

This wouldn’t necessarily be a problem if the vehicles driven were fuel-efficient – especially given that in rural areas you can typically drive at optimum speed (~90km/hr) with minimal need for the constant deceleration and acceleration that is part and parcel of urban driving. But as you say, many own thirsty 4x4s, even though 90% of the travel they do is on paved roads. Then there’s the fact that provision and maintenance of infrastructure is significantly less fuel-efficient at low population densities.

All up, I’d be willing to bet that if Australia was far less urbanised than it was then we’d be going through a lot more fuel than we do currently, along with the corresponding carbon emissions. And if we weren’t, it would purely be because we’d be enjoying lower standards of living, with correspondingly lower levels of consumption.

Tony Harris
15 years ago

I am prepared to bet a dollar US that Keen will make the walk.
That is a sign of real confidence, normally I only bet in Aussie dollars.

15 years ago

I agree that Keen is walking.